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Exclusive remedies regimes: how exclusive is “exclusive”?

May 2017 - Issue 93

Trying to find a way around an exclusive remedies clause is a familiar challenge. If, for whatever reason, one of the parties cannot utilise the contract’s code for claims, the question arises: is there any way around what seems to be an exclusive remedies regime? The Court of Appeal’s decision in Scottish Power UK plc v BP Exploration Operating Company Ltd provides useful guidance on this issue.

Exclusive remedies clauses

Exclusive remedies clauses are perfectly permissible. In Strachan & Henshaw v Stein Industries (UK), which remains the leading authority, the Court of Appeal observed that if parties wished to limit their potential liability to one another by such a scheme then there was: “no reason why the law should stand in their way and prevent them from doing so.”

The particular aims or advantages of limiting a contractual code may include imposing requirements to give notice on all claims, limiting the time periods in which claims can be made, or simply curtailing what might otherwise be very wide ranging liabilities arising in connection with a commercial contract.

However, while direct challenges to exclusive remedies regimes are uncommon, disputes frequently arise in which one party seeks to argue that a particular type of claim falls out of the contractual regime or is otherwise permissible on a proper construction of the clauses in question.

Scottish Power UK plc v BP Exploration Operating Company Ltd

Scottish Power entered into a series of long term gas sale and purchase agreements with BP, the operators of a gas field in the North Sea (the Agreements). Article 7.1 of the Agreements imposed an obligation on BP to repair, maintain and operate the relevant natural gas facilities to the standards expected of a skilled and experienced operator.

Under the Agreements, BP was obliged to deliver each day the quantity of gas that Scottish Power had nominated. Article 16 of the Agreement then set out a contractual regime dealing with the consequences of undeliveries (i.e. failure to deliver the nominated quantity of gas).

It created a scheme by which –

A quantity representing the difference between the amount of gas nominated by Scottish Power and that actually delivered by BP was referred to as “default gas”.

The price payable for default gas was 70% of the regular contract price for the gas.

Scottish Power was entitled to draw down gas at that lower default gas price until the full quantity of default gas to which it had accrued an entitlement had been exhausted.

The key provision was Article 16.6 which provided: “the delivery of Natural Gas at the Default Gas Price…shall be in full satisfaction and discharge of all rights, remedies and claims howsoever arising whether in contract or in tort or otherwise in law on the part of Scottish Power in respect of underdeliveries by BP under this Agreement, and save for the rights and remedies set out in Clauses 16.1 to 16.5…Scottish Power shall have no right or remedy and shall not be entitled to make any claims in respect of any such underdelivery.”

In May 2011, BP decided to close down the relevant gas facilities for a period of three and a half years for operational reasons. During that period, Scottish Power continued to make its daily nominations but no gas was delivered. During the shutdown, Scottish Power sourced gas from alternative providers to meet its needs but the price of the replacement gas was higher that the contract price under the Agreement.

Scottish Power brought proceedings claiming damages for breach of Article 7.1 of the Agreements on the basis of BP’s failure to operate the facilities during the relevant period. It claimed the difference between the contract price and the amount paid for substitute gas, said to be approximately £85 million.

BP was found to have breached its obligations under Article 7.1 to operate the facility. The key area of dispute between the parties was whether Scottish Power’s rights and remedies in respect of such breaches were confined to its entitlement to delivery of natural gas at the lower default gas price, such that it could not advance its damages claim for breach of Article 7.1.

The presumption against giving up rights and remedies

Scottish Power based its argument on the observation of Lord Diplock in Gilbert-Ash v Modern Engineering that there is a starting presumption that parties do not intend to give up rights or claims that the general law gives them. It then argued for a confined reading of the construction of Article 16, suggesting that its claim was not one “in respect of undeliveries” because it was not a necessary part of its cause of action to establish that there had in fact been any undelivery.

It submitted that –

Since there were two possible meanings of the relevant contractual provisions, the presumption identified by Lord Diplock led to the result that Scottish Power should not be taken to have given up very valuable contractual rights.

The contrary conclusion would render the obligations imposed by Article 7.1 meaningless or would reduce them to mere statements of intent.

The Court of Appeal disagreed, and considered it to be clear that the contractual remedial regime in respect of undeliveries was intended to be comprehensive. When interpreting a contractual clause, it was necessary to exercise all the tools of construction to discern what the clause really means. If, having done so, the answer becomes clear: “…the court should give effect to it even though the interpretation may deprive a party of a right at law which he might otherwise have had.”

Conclusion

This judgment corroborates the general legal trend in interpretation of contracts and reflects cases such as Arnold v Britton [2015] which show the court treating the natural meaning of language as the best guide to interpretation. Nobahar-Cookson v The Hut Group [2016] further recognises that “commercial parties are entitled to allocate between them the risks of something going wrong in their contractual relationship in any way they choose.” The simple fact that it transpires that the common law rights replaced in the present case were of far greater value to the buyer than the default gas price regime was not a reason to change the natural meaning of the words used by the draftsman.

Most importantly, the case has changed the way in which the court now approaches cases where there is a dispute as to whether a contractual remedial regime was intended to provide the sole remedy for breach of contract to the exclusion of all other claims. In circumstances where an exclusion clause has an alternative possible meaning, there is no longer a strict presumption which requires the court to choose the meaning which avoids a party being found to have given up legal rights. Instead, the court will approach the exercise with a linguistic, contextual, purposive and common sense analysis, with a view to finding out what the clause really means, even if that results in a party losing valuable legal rights.